Harmonic Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Nine-month figures cover the periods ended on those respective dates. Harmonic provides video delivery and cable access products, software, and services through its Video and Cable Access segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $115.7 million | $100.6 million | $280.7 million | $289.9 million |
| Gross profit / margin | $75.5 million / 65.3% | $50.1 million / 49.8% | $161.3 million / 57.5% | $148.9 million / 51.4% |
| Operating income (loss) | $22.5 million | $(3.7) million | $6.4 million | $(12.3) million |
| Net income (loss) | $11.7 million | $(7.8) million | $(11.5) million | $(24.4) million |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $1.1 million | $5.7 million |
- Quarterly revenue rose 15%, primarily on Cable Access growth; nine-month revenue fell 3%. Appliance and integration revenue was $83.1 million for the quarter and $189.9 million for the nine months; SaaS and service revenue was $32.6 million and $90.8 million, respectively.
- Video revenue declined 18% in Q3 to $60.1 million and 11% year to date to $198.9 million. Cable Access revenue increased 98% in Q3 to $55.7 million and 23% year to date to $81.8 million. Management attributed the Video declines largely to bookings shifting into Q4.
- Management attributed the gross-margin improvement chiefly to $37.5 million of CableOS software license revenue recognized under Comcast’s enterprise license agreement. Segment results were mixed: Q3 Video recorded a $1.7 million operating loss, while Cable Access recorded $31.6 million of operating income.
- Q3 included a $5.7 million loss on extinguishment of debt. Nine-month interest expense, net, was $8.9 million, versus $8.5 million a year earlier; other expense, net, was $2.3 million, largely reflecting foreign-exchange losses.
- Cash and cash equivalents were $66.7 million at September 27, 2019, versus $66.0 million at December 31, 2018. Current assets were $236.9 million and current liabilities $146.5 million. The company generated $1.1 million of operating cash in the first nine months, with working-capital needs a key use of cash.
Debt, liquidity, and significant transactions
- In September, Harmonic issued $115.5 million of 2.00% convertible notes due 2024 and used approximately $109.6 million of proceeds to repurchase $82.5 million principal amount of its 4.00% notes due 2020. At quarter-end, principal outstanding was $115.5 million on the 2024 notes and $45.8 million on the 2020 notes; other debt and finance lease obligations totaled $17.3 million.
- Management said current liquidity was expected to fund planned cash needs for at least the next 12 months. The company terminated its $15 million Silicon Valley Bank revolving facility in connection with the refinancing; it had no borrowings under the facility before termination.
- Comcast committed to $175 million in CableOS enterprise license fees over four years, subject to incentive credits, and agreed to pay the initial $50 million in 2019. At quarter-end, $110.3 million of transaction price remained allocated to future performance obligations, expected to be recognized over three to four years.
- In connection with the Comcast agreement, the company deemed all remaining milestones on Comcast’s warrant satisfied. The warrant for up to 7.8 million shares became fully vested and exercisable. Its value is recognized as a reduction of revenue; Harmonic recorded $13.1 million of warrant amortization as a revenue reduction in the third quarter and nine-month period.
Outlook, risks, and other items
- No specific revenue or earnings guidance is provided in the filing. Management described CableOS deployments as progressing but still early, with field trials, long customer sales cycles, and possible near-term challenges. It also continues shifting Video toward software-centric and SaaS offerings.
- Customer concentration is material: Comcast represented 44% of Q3 revenue and 24% of nine-month revenue. The top 10 customers accounted for 57% and 46%, respectively. A slower or smaller-than-expected Comcast deployment, or reduced orders from major customers, could materially affect results.
- Other notable exposures include customer capital-spending cycles, technology transitions and competition, reliance on suppliers and contract manufacturers, foreign exchange, and execution of software-based product development. The filing also highlights debt-service and potential cash-settlement obligations on convertible notes.
- Commitments included approximately $45.8 million of non-cancelable inventory and other purchase commitments. The company reported ordinary-course legal matters for which potential losses could not be reasonably estimated, and $2.0 million of accrued Avid litigation settlement fees. No off-balance-sheet arrangements were reported.
- Disclosure controls and procedures were assessed as effective at a reasonable-assurance level; management reported no materially significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Comcast license commitment translates into continued deployments and recurring CableOS demand, and how incentive credits affect realized revenue.
- Whether Video bookings recover as management expected in Q4, given the nine-month decline and customer caution on technology investments.
- How much operating cash flow can improve as receivables, inventory, and other working-capital balances change.
- The cash, dilution, and refinancing implications of the 2020 and 2024 convertible notes, including conversion and fundamental-change provisions.
- Collection and timing of the French R&D tax credits: approximately $22.3 million was receivable, with recovery expected from 2020 through 2023, and related French-government-backed loans remained outstanding.
- Potential effects of customer concentration, foreign-exchange movements, purchase commitments, and unresolved litigation on future results and liquidity.